With the dawn of another new year, it is worthwhile looking back at the previous year to learn where we went wrong and consider a positive way forward. Many policy reforms are needed to enhance economic growth and ensure more inclusive growth.
The government expects the economy to grow by 5.8 per cent in 2017, much higher than the growth rate of just 4.7 per cent predicted by the IMF. It is time to reflect whether we actually could achieve this rosy picture.
Sri Lanka is currently in the 73rd position in the Human Development Index. However in the Global Enabling Trade Index, Sri Lanka has slipped to 103rd position in 2015 out of 136 countries, from being at 96th in 2014. There is moderate poverty prevailing in the country even amidst the decline in extreme poverty. Pockets of poverty still exist in many areas of the country. The positive fact however, is that the real consumption of the bottom 40 per cent of the population has increased annually.
Third quarter performance
In the third quarter of 2016, Agriculture has contributed to 7.6 per cent of GDP while Industries and Services contributed to 30.5 and 56.0 per cent respectively. Industrial sector has recorded a significant growth rate of 6.8 per cent with its sub-sectors: Construction; Manufacture of food, beverages & tobacco; Manufacture of textiles, wearing apparels; and Mining & quarrying having played key roles in contributing to its growth.
Services sector, too recorded a positive growth rate of 4.7 per cent where the largest contributions are from Financial service activities & auxiliary financial services; Insurance, reinsurance & pension funding; Telecommunication; and Education. In contrast, Agricultural sector has recorded a negative growth rate of 1.9 per cent.
In the first eight months of 2016, Sri Lanka’s trade deficit increased by 1.6 per cent. Even though targets of earning tax and non-tax revenue were somewhat successful, Sri Lanka could not control expenditure overruns. However, this trade deficit was largely offset by the current account figure in the Balance of Payments which stood at a surplus of US $ 1.5 billion in the same period due to increased remittances and increased earnings from tourism. Tourist earnings accounted for US $ 2.2 billion and remittances amounted to US $ 4.8 billion in the first eight months.
The trade performance of Sri Lanka during the first eight months of the year is quite unsatisfactory. Earnings from exports from January to August accounted for US $ 6.9 billion which is a decline from US $ 7.2 billion in the same period in 2015. The deficit worsened by import expenditure which reduced only by 1.6 per cent in the above period. However, quite noteworthy is the fact that the performance of exports has improved after August in 2016 which gives hope to a favourable trend in the trade balance at the end of the year. It is of the experts’ view that this satisfactory performance in exports would improve the trade balance, given the import expenditure would continue its reduced trend.
The unsatisfactory performance in Sri Lanka’s trade with other countries is further ascertained by the fact that our exports are only 56 per cent of our total imports. This draws our attention to another issue, which is that the country is not earning enough revenue, and that government expenditure is comprised of taxpayers’ money and the money that has been borrowed from others. Prioritizing our expenditure is essential with regard to this.
For Sri Lanka to sustain economic growth in the coming year, it is vital to diversify the economy and improve productivity. Fiscal revenue targets need to be increased, which are still low when compared to other countries in the world. Wasteful expenditure need to be cut off, and the limited funds we have should be prioritized. An effective and efficient tax administration is therefore essential. Taxes which only target consumption are not adequate. High number of taxes and the complicated tax structure discourage doing business in Sri Lanka, and negatively impacts on the country’s trade competitiveness in the international arena.
On the other hand, policy certainty is imperative in order to thrive local businesses, industries and foreign investments. Priority towards an export-led economic growth and a determined effort to increase revenue could help in containing Sri Lanka in obtaining further debt. The debt trap which is the most serious issue we face at present could only be coped with by a lower trade deficit and a surplus in the Balance of Payments.
Sri Lanka should not expect the Balance of Payments to be continuously relied on remittances and tourist earnings, as the latter are very much related to global economic conditions. Therefore,totally relying on them is risky for a developing country like Sri Lanka. Sri Lanka should focus on inclusive growth, and divert its investments to areas which suit most to the industry in consideration, and reduce regional disparities. Last but not least, as the country is done with the 30-year long war, it is everyone’s responsibility not to allow for any communal clashes which would in turn be an impediment for Sri Lanka’s development for a long time, if they are not rooted out.